An irreverent Wall Street Blog
FINRA Bars Rep Who Knew Someone
September 27, 2019
When it comes to settling allegations of industry misconduct, the Financial Industry Regulatory Authority often seems in a rush to get something on paper and publish it. In that flurry of activity to get it down in writing and get it signed, what emerges as the final draft isn't always as precise as it should be. Sometimes we need to infer what happened. Sometimes we don't have enough facts to infer and are forced to make our own assumptions, regardless of whether they are well-founded. Sometimes, no matter how often we read and re-read a FINRA settlement document, we are left puzzled by what happened or why certain cited conduct is deemed "misconduct." In a recent FINRA AWC settlement, it seems pretty clear that the registered rep engaged in misconduct -- all the more so because he entered into the settlement and signed off on it. In fact, some of FINRA's allegations make a strong case, however, other allegations don't. For starters, it just can't be a violation for anyone to simply "know" that someone is a corporate director, officer, or employee. Perhaps someone at FINRA might exercise just a tad of quality control before releasing these AWC's for publication?
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Joseph H. Pratt submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Joseph H. Pratt, Respondent (FINRA AWC 2014043750301)
https://www.finra.org/sites/default/files/fda_documents/2014043750301
%20Joseph%20H.%20Pratt%20CRD%20719416%20AWC%20jm.pdf
%20Joseph%20H.%20Pratt%20CRD%20719416%20AWC%20jm.pdf
The AWC asserts that Pratt entered the industry in 1980, and by January 2008, he was associated with FINRA member firm Wells Fargo Advisors, LLC, The AWC asserts that Pratt "does not have any relevant disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."
Away Trades
The AWC alleges that in violation of NASD Rule 3040 and FINRA Rule 2010, from 2009 through 2013, Pratt made about 18 personal investments totaling $119,000 in Company B, which the AWC characterizes as a "private, start-up company." FINRA deemed said investments to have been executed "away from" Wells Fargo. The AWC concedes that Pratt had "received approval to make a one-time personal investment in Company B;" however, the settlement document asserts that:
[P]ratt did not provide Wells Fargo with prior written notice or obtain prior approval for his subsequent 18 personal investments. . .
SIDE BAR: Given that Pratt "made about 18 personal investments" from 2009 through 2013, and he "received approval to make a one-time personal investment," it is impossible for the AWC to allege that he "did not provide Wells Fargo with prior written notice or obtain prior approval for his subsequent 18 personal investments." The AWC concedes that at least one of the 18 personal investments (i.e., the first one) was made with the requisite prior notice/approval. Since all the trades cited in the AWC were placed in 2009 through 2013, it would seem incumbent upon FINRA in 2019 to know the exact number of improper "personal investments" that Pratt has been charged with making. "About" 18 just doesn't cut it at this late date.
Solicitations
In addition to his cited personal investments in Company B, the AWC alleges that in further violation of NASD Rule 3040 and FINRA Rule 2010:
[B]etween 2009 and 2012, Pratt also solicited six individuals, five of whom were his Wells Fargo customers, to invest approximately $436,000 in shares of Company B, a speculative company. Pratt provided these investors with Company B presentations and arranged for in person meetings between the investors and Company B management. Company B did not succeed.
In characterizing Pratt's cited solicitations, the AWC alleges that he "failed to provide prior written notice or obtain prior approval for his solicitation of investors in the private securities transactions in Company B."
Confidential Information
The AWC alleges that in November 2011, Company A ("a clinical-stage biopharmaceutical company focused on the development of a class of drugs for treating autoimmune and inflammatory diseases") sent Wells Fargo a letter stating that Pratt had
been attempting to obtain confidential information from several company insiders. The AWC asserts that:
[P]ratt knew Company A insiders, including a director, a member of the company's Scientific Advisory Board, and a doctor involved in FDA clinical trials. On numerous occasions, Pratt failed to disclose these relationships to the Firm as required.
In response to the November 2011 letter from Company A, Wells Fargo allegedly prohibited Pratt from speaking with Company A
employees. Thereafter, the AWC asserts that in violation of FINRA Rule 2010:
[D]espite this prohibition, in 2013 and 2014, Pratt continued to seek information from Company A. In response to Pratt's inquiries, Company A insiders sent Pratt documents and emails containing confidential information concerning Company A's ongoing FDA clinical trials, including patient data from the trial, newly discovered data that the company felt warranted a patent, and a confidential timeline of upcoming FDA filings. Pratt disseminated the confidential information he obtained from Company A to several of his Wells Fargo customers.
Voluntary Termination
The AWC asserts that:
[O]n December 8, 2014, the Firm filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") reporting that Pratt's employment had been voluntarily terminated on November 11, 2014. On February 11, 2015, Wells Fargo filed an amended Form U5 stating that the Firm's internal review indicated that Pratt had solicited at least one investor in an unapproved private securities transaction.
FINRA Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Pratt a Bar from association with any FINRA member in any capacity.
Bill Singer's Comment
Somewhat lost in the AWC are the dates at issue; namely, Pratt's personal investments between 2009 and 2013, and investor solicitation between 2009 and 2012. The trade dates are so aged that the AWC charges Pratt with violations of the former NASD Private Securities Transaction Rule 3040, which was replaced by FINRA Rule 3280 in 2015! I pertinent part, NASD Rule 3040: Private Securities Transactions of an Associated Person stated:
(a) ApplicabilityNo person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.(b) Written NoticePrior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.(c) Transactions for Compensation(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:(A) approves the person's participation in the proposed transaction; or(B) disapproves the person's participation in the proposed transaction.(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.(d) Transactions Not for CompensationIn the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.(e) DefinitionsFor purposes of this Rule, the following terms shall have the stated meanings:(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.
Single Written Notice
NASD Rule 3040(b) states that "in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice." Pratt provided a single written notice (because the AWC says that Pratt had "received approval to make a one-time personal investment in Company B;" however, the AWC fails to explain whether Pratt thought that he had been given approval for a subsequent "series of related transactions." Even if that state of mind was based on Pratt's misunderstanding of the Rule or of the nature of his notice, that should have been better addressed in the AWC. Similarly, to the extent that Pratt had solicited the six individuals cited in the AWC, FINRA should have clearly noted whether Pratt had received any "selling compensation." You may think that a minor point but it is NOT a minor factor in NASD Rule 3040, as it impacts both sections (b) and (c) and has its own definition under (e)(2). I didn't write the Rule. FINRA did. FINRA is sanctioning Pratt for violating the Rule. At least address the key components of the Rule that are being invoked against the Respondent.
http://www.brokeandbroker.com/index.php?a=topic&topic=psthttp://brokeandbroker.com/PDF/Rule3280PSTAnalysis.pdf
Who Knew?
The AWC asserts that Pratt had some duty to disclose to Wells Fargo that he:
knew Company A insiders, including a director, a member of the company's Scientific Advisory Board, and a doctor involved in FDA clinical trials. On numerous occasions, Pratt failed to disclose these relationships to the Firm as required.
If, in fact, there is a specific FINRA Rule that says all associated persons of all member firms have an ongoing duty to disclose that they "knew" that various individuals were a Director, a Board member, or an employee of every single company in existence, I'd love to see the citation to that rule. To the extent that FINRA meant to say something other than that, then the AWC should have said what it meant and meant what it said. I find it hard to believe that it is a violation of Wells Fargo's policies for all of its associated persons to not disclose that they know that someone is a Director of a company or a Board member.
BrokerCheck
Online FINRA BrokerCheck records as of September 27, 2019, disclose that Pratt voluntarily resigned from Wells Fargo on November 11, 2014, based upon allegations that:
MR. PRATT VOLUNTARILY RESIGNED FROM WELLS FARGO ADVISORS CONCURRENT WITH THE FIRM'S REVIEW OF MR. PRATT'S RELATIONSHIP WITH TWO OUTSIDE COMPANIES, AND CERTAIN CLIENTS INVESTING IN A PRIVATE INVESTMENT NOT ASSOCIATED WITH WELLS FARGO. THE FIRM'S REVIEW OF THIS MATTER WAS NOT PROMPTED BY A CLIENT COMPLAINT.
In response to that narrative, Pratt purportedly provided a "Broker Statement" that also appears on BrokerCheck:
MY COMPLETELY VOLUNTARY RESIGNATION FROM WELLS FARGO ADVISORS ('WFA") TO JOIN STIFEL NICHOLAS WAS UNRELATED TO ANY INTERNAL REVIEW. I WAS NOT INFORMED OF ANY SUCH REVIEW WHEN IT WAS INITIATED AND WAS TOLD ABOUT IT ONLY ONE BUSINESS DAY BEFORE I RESIGNED, AFTER I HAD BEEN WORKING FOR A MONTH AND A HALF MAKING PLANS TO SWITCH FIRMS. THE DAY BEFORE I LEFT MY MANAGER TRIED TO DISSUADE ME FROM LEAVING BY TELLING ME THERE WAS SUCH A REVIEW. A NUMBER OF YEARS AGO I INVESTED IN SEVERAL PROMISING PRIVATE PLACEMENTS, AS DID A FEW OF MY CLIENTS, SOME OF WHOM BROUGHT SUCH OPPORTUNITIES TO MY ATTENTION. ALL MY PRIVATE PLACEMENTS WERE APPROVED BY PREDECESSOR FIRMS (A.G. EDWARDS AND WACHOVIA) LATER ACQUIRED BY WFA. EACH PRIVATE INVESTMENT WAS ALWAYS FULLY DISCLOSED ANNUALLY TO ALL EMPLOYERS. THESE INVESTMENTS WERE MADE AS FAR BACK AS 2003 AND NONE ARE RECENT. I HAVE VIOLATED NO INDUSTRY RULES, REGULATIONS OR STANDARDS OF CONDUCT AND THE UNCOMPLETED WFA REVIEW HAS NOT FOUND OTHERWISE.